Retail fundsAvailable vehicles
What are the main legal vehicles used to set up a retail fund? How are they formed?
‘Retail funds’ are commonly referred to as being funds available and generally eligible for non-professional investors. ‘Non-professional investors’ are defined as investors other than professional investors. ‘Professional investors’ are defined in accordance with the definition set out in MiFID II, implemented in Norway in the STA and the Norwegian MiFID II regulation thereunder. The following apply to funds available to non-professional investors.
Open-ended retail funds
Investment funds are categorised as UCITS or AIF, and the latter includes domestic funds, special funds and other AIFs (see question 1). Open-ended retail funds may be structured as UCITS or domestic funds.
Norwegian ‘investment funds’ are classified as a special type of legal vehicle or entity. All such funds established in Norway have their own business register number and are registered in the Norwegian register of business entities as mutual funds. A Norwegian fund is, however, of a semi-contractual nature, and does not have its own board of directors, managing director or employees. Investment funds may only be established by an authorised fund manager (authorised in Norway or within the EEA where the passporting process is applicable) and funds are formed by adoption of the fund’s articles of association and the NFSA’s approval of the articles and the application for authorisation. The fund manager is appointed in the fund’s articles of association and the manager acts on behalf of the fund. Unitholders in the fund exercise influence in the fund’s management through representation in the management company’s board of directors and not in the fund itself.
Collective investment structures established as legal vehicles other than the above-mentioned ‘funds’, such as a limited liability company (AS) or as a partnership (ANS, DA or KS) or similar foreign entities, may also fall within the scope of Norwegian fund regulation, based on individual assessments. Open-ended funds will usually fall within the scope of the IFA. The AIFMA regulates managers and not funds as such, and is therefore not restricted to certain kinds of legal vehicle. If Norwegian fund regulation applies to such other legal vehicles, the requirements regarding authorisation and establishment by a manager described above apply.
Closed-ended retail funds
Investment funds subject to the IFA shall, in general, be open for subscription and redemption twice a month (open-ended). The NFSA may, however, grant permission for domestic funds, to some extent, and for special funds, to derogate from these requirements and thus be closed-ended funds, which may be available to non-professional investors, subject to the general investor protection rules in MiFID II and the STA. Funds subject to further restrictions than these permitted restrictions fall outside the definition of investment funds and are thus not subject to the IFA and the retail protection therein. Such closed funds are generally not considered retail funds. There are no restrictions regarding the legal vehicle used to establish closed-ended funds in Norway.Laws and regulations
What are the key laws and other sets of rules that govern retail funds?
The establishment and operation of all investment funds, including open-ended retail funds, are governed by the IFA regulations and effective orders made by the NFSA. In addition, the rules of the specific fund, as well as regulations, guidelines and recommendations by the Norwegian Fund and Asset Management Association, apply. AIFs are also governed by the AIFMA, the AIFM regulations and executive orders made thereunder.Authorisation
Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?
The establishment and marketing of funds available to non-professionals require authorisation, either from the NFSA or by the regulator in an EEA state where the passporting procedure applies (see questions 3, 4 and 7).Marketing
Who can market retail funds? To whom can they be marketed?
There are no formal restrictions governing who may market retail funds or the intended recipient of such marketing. Instead, retail funds can be marketed to any type of investor. Furthermore, the marketing entity does not need to be licensed or authorised provided that the marketing does not include the offering of funds or would otherwise require a licence pursuant to MiFID II or under the STA. See, however, questions 7 and 8.Managers and operators
Are there any special requirements that apply to managers or operators of retail funds?
The IFA generally applies to retail funds, as the Act is aimed at protecting non-professionals. Non-retail funds are, however, subject to specific regulations and exceptions in Chapter 7 of the IFA. The AIFMA provides specific regulation of AIFs marketed to non-professionals, such as the requirement for authorisation (compared with unauthorised registered managers of AIFs to professionals) and the additional requirement for Norwegian marketing authorisation for each fund.
Retail funds are characterised by extensive consumer protection rules whereby a manager of a retail fund must comply with a variety of special requirements that are not applicable in relation to other types of investment fund.
The most prominent requirement is the obligation to act exclusively in the common interest of the unitholders. Furthermore, the manager is required to, inter alia, maintain or cause to be maintained a register of all holders of units in the fund, immediately redeem a unit upon request from a holder and to maintain a suitable diversification of investments in accordance with the principle of ‘risk spreading’ (see question 17).Investment and borrowing restrictions
What are the investment and borrowing restrictions on retail funds?
The investment of retail funds shall follow the risk-spreading principle and be made in financial assets associated with high liquidity, including transferable securities, money market instruments, derivative instruments, units in other UCITS and deposits with credit institutions. As a general rule, however, subject to exemptions, the value of the instruments issued by any single issuer may not exceed 5 per cent of the fund’s value.
A management company may not raise loans on behalf of an investment fund, impose on the fund surety or guarantee obligations or post the investment fund’s assets as security. A management company may not sell financial instruments not owned by the fund, unless specifically approved by the NFSA. This borrowing restriction does not, however, restrict the management company from, on behalf of the fund, raising short-term loans of up to 10 per cent of the fund’s assets and posting the fund’s assets as security for fulfilment of derivative contracts.Tax treatment
What is the tax treatment of retail funds? Are exemptions available?
Norwegian retail funds that are organised as investment funds, as described in question 12, will be covered under the Norwegian participation exemption method and be tax exempt for gains on shares in, and distributions from, companies resident in the EEA. An investment fund will also be tax exempt for gains on shares in companies outside the EEA. Three per cent of dividends that are exempt under the exemption method will be subject to a taxation of 23 per cent.
Regarding taxation of interest income, a retail fund organised as an investment fund will, as a starting point, be taxable with 23 per cent on interest income received. Securities funds may claim income deductions in respect of the amounts distributed to their unitholders. Deductions can, however, only be claimed to the extent that the distributions shall be taxed as interest on the part of the unitholders.
On rare occasions, funds organised as limited liability companies, limited partnerships and other legal vehicles may be considered retail funds. If so, they are subject to taxation regulation applicable to the specific legal vehicle; see question 29 regarding tax treatments of legal entities other than investment funds.Asset protection
Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?
The assets of all Norwegian investment funds shall be administered by and entrusted to a depositary for safekeeping. The fund manager must appoint a single independent depositary for each fund that it manages.
Only EEA credit institutions (with licences granted in an EEA home country and established in Norway through a branch) may act as depositaries. The engagement of a custodian may not be permitted for an entity whose interests may come into conflict with the management company or the unitholders.
The IFA and regulations thereunder set out certain commitments and obligations on depositaries and funds, which mirror the obligations regarding depositaries in the UCITS V Directive.
The organisational and governance requirements for UCITS also contribute to the protection of the fund’s assets.Governance
What are the main governance requirements for a retail fund formed in your jurisdiction?
A fund established in Norway as an investment fund is semi-contractual, based on the articles of association, and does not have its own board of directors, managing director or employees. These functions are fulfilled by the manager of the fund. Unitholders in the fund exercise influence in the fund’s management through representation in the management company’s board of directors and not in the fund itself. The fund itself only has a unitholders’ meeting, which decides on changes to the fund’s articles of association and mergers. Such decisions require consent from a qualified majority of 75 per cent. Fund managers are, however, subject to detailed regulation regarding governance requirements etc, implementing the UCITS V Directive governance requirements, primarily including risk management, handling of potential conflicts of interest and acting in a manner that maintains the public’s confidence in the fund market. More detailed guidance is provided by the NFSA.
In connection with the authorisation process (and upon revision thereof), the management company is required to submit to the NFSA a number of documents, including, for example, the prospectuses, KIIDs, an annual report and a semi-annual report. Upon authorisation being granted, the fund manager and the retail fund will be registered in the NFSA’s public register. The management company must have a board of directors that consists of at least five members and a managing director, and is obliged to maintain, or cause to be maintained, a register of all holders of units in the fund.
In addition, a management company must document and preserve each portfolio transaction for all UCITS it manages. The documentation must be retained for at least five years and must contain sufficient information in order to reconstruct each transaction performed.Reporting
What are the periodic reporting requirements for retail funds?
A management company must submit a semi-annual report containing a profit and loss account and a balance sheet for the management company itself to the NFSA. Quarterly reports must also be submitted for each retail fund managed, including information on, for example, the type of fund managed, net asset value of the fund assets, fees charged for the subscription and redemption of units in the fund and the assets and liabilities of the fund.
For each fund, the manager shall publish an annual report with annual financial statements and a management report, as well as a semi-annual report.
The semi-annual report shall contain information, inter alia, on the following:
- the fund’s financial instruments;
- bank deposits;
- liabilities resting on the fund;
- number of units issued;
- the value of a unit less redemption fee;
- all obligations resulting from the fund’s transactions undertaken in the reporting period;
- returns in the reporting period and returns in the last five years;
- other matters that are assumed to be of interest to the unitholders and that are necessary in order to assess the fund’s development and position; and
- the management fee.
Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?
A Norwegian UCITS is, by statute, an open-ended investment fund available to the public. As such, the fund must accept investments. In general, no restrictions may be placed on the issue, transfer and redemption of units in the funds. However, it is possible to impose rules stipulating, for example, a minimum subscription amount. Upon the request of a unitholder, a unit must be redeemed immediately and may only be postponed under extraordinary circumstances.
A Norwegian domestic or special fund may, however, subject to the NFSA’s consent, incorporate restrictions on the issue of units in the fund. In addition, a special fund may limit the possibility for investors to redeem their units to once per year. Restrictions must be incorporated in the fund rules that must be approved by the NFSA in connection with the formation of the fund.
Investment funds shall be open for subscription and redemption of units in cash at least twice a month. A unitholder may request redemption of his or her units unless:
- otherwise prescribed by agreement on defined contribution pension pursuant to the Defined Contribution Pension Act or an individual pension scheme pursuant to the Individual Pension Schemes Act;
- under special agreement with major unitholders the management company limits the number of units whose redemption may be requested by the latter during specified periods;
- if called for in the interest of the unitholders or the public, the NFSA orders the management company to wholly or partially suspend the right of redemption; or
- the management company adopts a decision to liquidate the fund or the management company’s authorisation has lapsed or been withdrawn, after which units of a fund must not be issued or redeemed after.